The Regulator today published its proposed regulatory approach to DB schemes and funding. In addition to a revised Code of Practice ‘Funding Defined Benefits’ it also provided a strategy paper and a policy statement. TPR has invited the pensions industry to comment on these documents by 7 February 2014.
The Code of Practice
This summarises the Regulator’s expectations for trustees. As anticipated it is more of a summary of existing practice rather than a sea-change in its views. However the draft code does now incorporate its proposed new statutory objective on sustainable employer growth. The principal recurring themes are:
- TPR expects trustees to manage covenant, funding and investment risks in an integrated way
- Trustees should aim for deficits to be removed as quickly as employers can reasonably afford without unreasonably impacting on the employer’s growth and investment plans
Funding policy
Containing the same themes as the Code of Practice it sets out how TPR will balance its objectives and target its resources. Scrutiny of individual schemes will be based on TPR’s assessment of how successfully schemes have been able to balance covenant, funding and investment risks. A Balanced Funding Outcome factor will be calculated whereby the funding plan achieved will be compared against a ‘straw man’ appropriate to a scheme’s covenant and maturity. Investment and mortality risk will also be taken into account. The BFO factor will express how far a scheme deviates from TPR’s expected position with those that deviate further attracting greater scrutiny. A ‘risk bar for intervention’ acts as a filter such that larger schemes representing a greater concentration of risk and call on the PPF, can expect greater attention.
Argyll comment: With the exception of the introduction of TPR’s new objective on sustainable growth, we would regard the documents as very much a consolidation of TPR’s practice based on our experience and contact with the Regulator. Even with a new objective, TPR has previously emphasised the flexibility around seeking employer support so in our view the documents represent more evolution than revolution which we welcome. The Code of Practice echoes previous documents and highlights the need for trustees to consider independent support in assessing the covenant. In our view the need for independent expert advice is greater now that trustees have to judge the merits of a company’s business plans and not just past performance.
